The Advantages of Forming an LLC

Not everyone pursuing a business venture will be able to get the backing of angel investors or venture capital firms. For this reason, many people who start businesses do so as limited liability companies (LLCs).

What advantages does forming an LLC have? There are many benefits to starting an LLC. In this article, we discuss why you should form an LLC as well as some of the major advantages that come with it.

LLCs are affordable and easy to form

Many states offer online filing systems, and you may often be able to file without ever visiting a government office.

The cost of forming an LLC also varies depending on your state but is often less than $200. You may also need to pay state or local filing fees or franchise taxes on your LLC.

LLCs protect your personal assets

An LLC is distinct from a corporation (in which the owners are personally responsible for the company’s debts) and a general partnership (in which the partners are personally responsible for the company’s debts).

With an LLC, your personal assets are protected from company debts, such as those resulting from a lawsuit. In an LLC, members own shares in the company and have a stake in its success.

The members also have a fiduciary duty to act in the best interests of the company. If someone brings a lawsuit against your company, they cannot directly go after your personal assets.

Instead, the plaintiff goes after the company’s assets. They can seize the company’s assets, like real estate or company bank accounts, but they cannot take your personal assets like your car or home. Your personal assets are shielded from any lawsuits or debts.

LLCs have flexible management structures

LLCs offer greater flexibility in management structures than a corporation. Corporations have a board of directors and stockholders who must be kept informed of major decisions.

In an LLC, members can make almost any decision without consulting with other members. In a corporation, major decisions must be approved by a board of directors who are elected by the company’s stockholders.

However, the members of an LLC and the roles they play can be more flexible and informal than in a corporation. Corporations come with stricter requirements for membership and directors, whereas LLCs allow for more informal management structures.

Mergers and acquisitions are easier with LLCs

Mergers and acquisitions are often easier with LLCs. Corporations are often concerned about maintaining a certain amount of “equity value” for their owners.

If a corporation is worth $100 million and acquires another company for $100 million, there is no real change in value. However, if a corporation is worth $100 million and acquires another company worth $10 million, the total value goes up to $110 million.

The owners of the corporation will want to pay them a certain amount for their shares. If the acquiring company is an LLC, then the owners of the company can buy the shares of the other company with their company assets.

Company independence is easy to maintain in an LLC

Company independence is important for businesses that may want to take investments or be acquired by another company. With an LLC, you can specify that your company is managed by managers who may make some decisions without consulting with the members.

This may be important if you want to raise outside capital (through an investment by a venture capitalist, angel investor, or private equity firm).

If you are managing the company on your own and want to keep your options open for investment or acquisition, it is important to maintain complete control over your company and its assets. You may not want to give up a percentage of your company in exchange for investment or make the terms of acquisition too onerous.

Unexpected benefits of forming an LLC

Some business owners are surprised to find that other benefits come with forming an LLC. For example, if you work out of your home office, a home office deduction may be available if you work as an independent contractor.

If you have employees, you may be eligible for a social security number for your company. You may also be able to open a company bank account and receive benefits from your state’s Small Business Development Center.

Summing up

If you are starting a business, it is important to consider how to structure your business. An LLC is a common business structure because it offers protection for your personal assets.

As a member of an LLC, your fiduciary duty is to act in the best interests of the company. Before you start your business, make sure that you understand the advantages of forming an LLC.

For more information, contact your state’s secretary of state or a business attorney to help you understand the process of forming an LLC.